ESG ETFs: More Than Just a Feel-Good Investment

Socially responsible, sustainable investments and ETFs that track environmental, social and governance criteria may be seen as a way for people to make a conscientious impact while investing, but the strategies also offer more than just a do-good attitude.

“We believe in a no-compromise approach when it comes to performance expectations for ESG. After all, these are investments—not donations. A fund’s record in choosing companies with lower carbon emissions may be compelling, but it is financial performance that keeps clients invested,” Brie P. Williams, Head of Practice Management for State Street Global Advisors, said in a note.

For example, investors can look to something like the SPDR MSCI ACWI Low Carbon Target ETF (NYSEArca: LOWC). LOWC targets the MSCI ACWI Low Carbon Target Index, which tries to address carbon exposure by overweighting companies with low carbon emissions relative to sales and per dollar of market capitalization, compared to the broader market. The ETF was created for the U.N. Joint Staff Pension Fund.

The socially responsible investments theme is more than a gimmick, and history is on their side. Williams pointed out that industry and academic studies revealed that ESG-related strategies exhibited better long-term risk-adjusted returns, lower downside and improved volatility. Mutual funds and separately managed accounts categorized as sustainable investments have already met or exceeded broad market performance, both on absolute and risk-adjusted basis, across asset classes and over time.

Williams argued that these types of long-term results are reasonable due to the way these funds screen or pick out component holdings.

“This is backed by sensible economic rationale. From a risk perspective, traditional investments that ignore ESG factors miss capturing information beyond financial statements that indicate higher risk exposure. From a returns perspective, as these strategies continue to expand, a virtuous cycle comes into play where investor interest rewards companies with good ESG scores, motivating other companies toward good corporate citizenship,” Williams said.

For more information on socially responsible investment strategies, visit our socially responsible ETFs category.